The Difference Between a Fixed and a Floating Exchange Rate

question 307

Multiple Choice

The difference between a fixed and a floating exchange rate regime is that with a _____ rate system, the _____, whereas with a _____ rate system it does not.

• A) fixed; central bank retains its ability to use independent monetary policy; floating
• B) floating; central bank retains its ability to use independent monetary policy; fixed
• C) fixed; government can use independent fiscal policy; floating
• D) floating; government can use independent fiscal policy; fixed

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Definitions:

Inefficiency

A situation where resources are not used in the best possible way, often leading to waste and a lower output than could be achieved.

Trade

The exchange of goods, services, or both between two or more parties.

Factors of Production

The assets employed to produce goods and services, encompassing land, labor, capital, and entrepreneurship.

Command Economy

A type of economic system where production, investment, prices, and incomes are determined centrally by a government.